On Dec 21, 2015, we issued an updated research report on Joy Global Inc. JOY. The slackness in demand due to an oversupplied commodity market is adversely impacting the company’s prospects. Amid declining bookings, the company has implemented several strategies to optimize its cost structure and realign production capacity to cope with sluggish orders. The company is using its overall inventory and working capital efficiency.
Joy Global’s earnings in the fiscal fourth quarter were ahead of the Zacks Consensus Estimate. Fiscal 2015 earnings also exceeded expectations. However, declines were noticed year on year. A depleting backlog and a decline in orders from some of its key markets are reasons for concern. Joy Global presently operates in a commodity surplus market, which puts commodity prices under pressure.
Joy Global also operates in a very competitive environment. It competes directly or indirectly with other manufacturers of surface and underground mining equipment, some of which are much larger than the company. Their financial strength might allow them to pass on additional advantages to customers and win more orders than Joy Global.
Despite having customers in other industries, Joy Global’s revenue generation is to a large extent tied to coal market demand. A major portion of Joy Global’s total revenue is generated from its thermal and metallurgical coal-mining customers. Overall, the global mining market is expected to remain under pressure in 2016 as it continues to rebalance due to the supply glut.
Courtesy its restructuring measures, the company realized considerable savings in fiscal 2015 and extended the program to fiscal 2016. The company expects to incur restructuring charges in the range of $30 million to $40 million and realize total savings of $85 million in fiscal 2016. Sensing the difficult times, management also lowered the annual dividend outlay by nearly $75 million, which would enable it to reduce debt and strengthen its balance sheet in fiscal 2016.
Joy Global expects fiscal 2016 total revenues and earnings per share to be lower than fiscal 2015 levels. The decline was due to weakness in demand for both underground and surface mining equipment. The industry heavyweight Caterpillar CAT expects sales to be 5% below 2015 levels with declines across all three of its major segments.
Joy Global currently has a Zacks Rank #5 (Strong Sell). We found a couple of better-ranked stocks in the mining and diversified machinery space — Astec Industries, Inc. ASTE and John Bean Technologies Corporation JBT — both carrying a Zacks Rank #2 (Buy).
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